When it comes to outperforming industries, few, if any, can hold a candle to the legal-weed industry. Over the trailing 12 months, the average marijuana stock with a market cap in excess of $200 million is up more than 300% -- and it's not hard to understand why if we look at the two catalysts behind pot stocks.
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To begin with, there's been a rapid and well-defined shift in how the American public views marijuana. In 1995, the year before California became the first state to legalize medical cannabis for compassionate use, a mere 25% of the public favored the idea of legalizing weed nationally, per Gallup. Last year, according to Gallup, favorability toward legalization was up to 60%, an all-time high. What's more, a Quinnipiac University poll from April showed that favorability toward legalizing medical cannabis was up to an overwhelming 94%.
Legal sales growth is the other catalyst. According to cannabis research firm ArcView, legal pot sales, which include medical and recreational weed, grew by 34% in North America last year, to $6.9 billion. Looking ahead, ArcView is projecting compound annual growth of 26% through 2021, which works out to a nearly $22 billion legal North American industry. These figures have simply been too alluring for some investors to ignore.
There's actually plenty to worry about if you're a marijuana stock investor
However, the marijuana industry and marijuana stocks, for that matter, are far from a sure thing. There are a number of obstacles standing in the way, and the U.S. federal government ranks very high up the list.
To begin with, marijuana is still a schedule I substance at the federal level. In plainer terms, it means cannabis is viewed as having no medical benefits and is entirely illegal. This categorization comes with a number of disadvantages for the pot industry, which includes an inability to obtain basic banking services, such as loans and checking accounts, and tax disadvantages tied to the sale of a federally illegal substance. Weed-based businesses aren't able to take corporate income-tax deductions like normal businesses.
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But it's not just federal laws that marijuana-stock investors have to worry about. U.S. Attorney General Jeff Sessions is another very serious concern. In May, Sessions sent a letter to Congressional leaders asking for permission to prosecute medical-cannabis businesses in the 29 states that had approved medical marijuana.
What's notable about the request is that the law specifically forbids the Justice Department from using federal funds to prosecute medical-cannabis businesses that are operating within the constraints of their states' laws. Sessions has been an ardent opponent of marijuana's expansion, and looks like a strong candidate to fight the movement every step of the way.
Pot-stock investors have to love this amendment
Marijuana-stock investors, however, may soon have something worth cheering. As announced last week, Sen. Patrick Leahy (D-Vt.) successfully introduced and passed the Rohrabacher-Blumenauer amendment in the Senate Appropriations Committee. This amendment is what currently forbids Sessions from utilizing federal funds to go after lawfully operating medical-cannabis businesses in the 29 legal states. If this amendment is included in the upcoming budget, it'll continue to deny Sessions the right to use federal funds to go after medical-marijuana businesses for at least another year.
The inclusion of this amendment in the upcoming budget would be a sigh of relief for a company like Medical Marijuana, Inc., (NASDAQOTH: MJNA), which has medical-cannabis businesses that focus on cannabidiol treatments in the U.S. and Mexico. For what it's worth, Mexico legalized medical marijuana nationally in June, which is doubly beneficial for Medical Marijuana.
Recreational pot is still in play, and that's bad news
Nevertheless, the Rohrabacher-Blumenauer amendment won't do anything to prevent Jeff Sessions or President Donald Trump from waging war against the recreational pot industry, should they choose to. According to Gallup's polling data, only senior citizens and Republicans still hold an unfavorable view on recreational pot, leaving the door open for the GOP to stamp out weed's recreational expansion.
Will it happen? No one knows that answer for certain, but we do know that now-former White House press secretary Sean Spicer implied, in February, that the current administration would be markedly different from the previous administration when it comes to federal marijuana enforcement. Once healthcare and tax-reform legislation are completed, it's possible the GOP will turn its attention to recreational pot, and proponents may not like what they see.
This is particularly worrisome considering that most marijuana stocks are fundamentally a disaster. To take nothing away from the phenomenal moves in the stock prices of pot stocks over the past year, most have been losing a lot of money, and can't back up their valuations. In the instances where marijuana stocks are profitable, most are valued at triple-digit price-to-earnings ratios with pie-in-the-sky expectations.
In other words, there's a very real possibility that marijuana stocks won't keep up with investors' expectations, making this a potentially dangerous industry in which to entrust your money.
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